Opinion: Urbanize India's "Small" Towns & Cities
India has one of the largest populations in the world, with more than 1.3 billion people residing in the sub-continent. Major cities have emerged in India with populations of more than 10 million each, yet, in total, they make up only 7% of the total population of India. All eyes are on these cities for innovation and investment, but what about the remaining 93% of the population?
According to Census & World Bank data, from 2009 to 2019, the urbanization rate in India has been 35%, compared to China's 60%, Brazil's 86% and Nigeria's 50%. India's quite far behind similar, rapidly growing economies. Why? The economic eco-system has not yet focused enough attention to uplifting India's "small" towns & cities, which do have significant populations.
The Growth of Small Towns in the US
In my opinion, India has the potential to mirror the growth of the United States in its urbanization trends. The US, in its early industrial growth, started with the likes of New York City, Chicago, Boston, Washington DC, Miami & more recently, San Francisco and Los Angeles, as its main cities. People would commute for hours in search of work opportunities and leisure. However, now, the US has urbanized to an extent wherein each state has multiple business & entertainment hubs.
Redfin, a popular real estate platform, data shows a large number of people moving from these metropolitan cities to Tier 2 & 3 cities such as Phoenix, Sacramento, Atlanta, Las Vegas, Portland and Austin, among others. In a Forbes study of the "Best Cities for Jobs", data has shown that cities with populations of less than 1 million people are seeing the strongest growth. Of the Top 30 cities for jobs, 18 represented mid-sized towns. The US Census Bureau highlighted an increase in "domestic migration away from the 53 major metropolitan areas with populations over a million and toward the 54 middle-sized metro areas in the 500,000 to 1 million range" (Forbes). Cities such as Provo-Orem, Utah, have become business hubs, with job counts increasing at 32% in the last 10 years (Forbes). The rise of Work-From-Home and internet connectivity, in general, is only driving this trend of moving away from these "superstar cities".
These migration trends are not only apparent for business and jobs, but also for leisure. A large amount of the 40 million Americans migrating each year is represented by retirees. Many retirees choose to spend their "American Dream" in warmer, sunnier states and cities like Florida and Texas. The cost of living is significantly lower, and the standard of living significantly higher.
The Current State of Urbanization in India
Currently, in cities like Delhi NCR, commuters travel up to 150 k.m. for their jobs. What if these jobs and city lifestyle was brought to their "smaller" towns and cities? In the last 20 years, many corporations have realized the opportunity of emigrating from superstar cities to smaller, less developed regions. The best examples are Gurgaon (Haryana), Noida (Uttar Pradesh) and Navi Mumbai (New Mumbai), Maharashtra. The reason is simply because there is more space at a cheaper price.
The main driving forces for the current urbanization growth has been led by the influx of startups, setting of many industries, sunrise sectors and property developers. According to the 2019 Consumer Sentiment Survey reveals, property investors have shown a preference towards tier 2/3 cities, with 26% of property investors viewing Ahmedabad, Kochi, Chandigarh, Jaipur and Nashik as ideal targets. Apart from low real estate prices, new infrastructure developments are better in such regions, unlike saturated metros. The Government's initiatives such as AMRUT (Atal Mission for Rejuvenation and Urban Transformation) are indicative of the push towards wider urbanization.
Though these new regions have developed, I believe there needs to be a further push to urbanizing India's "small" towns and cities. This is not something that I believe one particular sector, or specific corporations, will be able to achieve. It has to involve everyone. States such as Orissa, are already offering incentives for businesses and individuals to invest in the state in the forms of subsidies, tax benefits and so forth. With the push for privatization and strategic urban planning from the central government, I believe it can be achieved.
Why "Smaller" Towns and Cities are an Opportunity
India, as we all know, has a massive population. They are on track to become the world's most populated country by 2030, passing China. The reason why I keep referring to these "small" towns and cities in quotation marks, is because these "small" places, are not so small after all. As mentioned, the metropolitan cities only represent 7% of the total Indian population. The rest of the 97%, are in less developed regions. Though it is a herculean task to tap into the 97%, India can start by capturing a significant portion of that and building up.
The chart above shows the total populations of Tier 2 and 3 cities in some of the majorly populated states in India. That is a total of around 80 million people (these are numbers from the 2011 Census, so this number is only going to be much larger at present, considering an average overall population growth rate of 1.2% per year). That is 80 million consumers, which is close to the superstar cities total population of 95 million. Tapping into these 80 million consumers, increases India's metropolitan urbanization rate by almost two-fold. From 7% to 13%. Many of these 80 million, include new regions such as Gurgaon and Noida, but also have many lesser known ones such Vijayawada (AP), which have populations in excess of 1 million people.
How to Capture the Value
There are several different ways the value can be captured from India's "small" towns & cities. Broadly, they can be categorized in commercial value, leisure & consumer value and infrastructure value. All categories will have to act hand-in-hand for the full value to be captured in these geographies.
Mainly, the current focus has been in creating value through commercial and infrastructure projects. Commercially, some of India's Tier 2/3/4 cities are amongst the world's fastest growing cities. For example, Malappuram (Kerala) has seen 44% growth in the last 5 years. Cities growing as fast as Malappuram will allow for a deeper product and service penetration for all types of businesses. The Government is shifting from a top-heavy infrastructure development approach to a more bottom-up, which is enabling smaller towns and cities to excel and attract investment. Rapid investments in such cities will not only boost the SME sector, the "backbone of the economy", but also create incentives for larger corporations to look to.
As indicated in the 2021 Budget, privatization will only further fuel the growth of smaller towns and cities on a commercial level. If one were to look at the banking sector in India, largely dominated by public banks, it is quite behind other economic powerhouses. The ATM penetration remains at 0.001% (number of ATMs as a percentage of population) and 20% of the Indian population, 260 million people, remain unbanked. Why? An inefficiency in the public banking sector. Private banks will have more incentive to grow in a more aggressive manner, part of which means opening of new branches, more M&A activity and banking penetration across India. The opportunity for privatizing the banking sector will not lie in superstar cities, but smaller towns and cities. Private banks will be more able to tap into the less developed, yet fast-growing, regions. This will create more jobs, cash into the economy and will overall uplift these geographies. Consider the growth of J.P. Morgan Chase, Citi Bank, Bank of America and Wells Fargo in the US. JP Morgan has 40 subsidiaries in the US alone, and some these acquisitions were strategic to increase their presence in emerging regions of the US. The banking sector is just one example of how privatization can fuel the growth of the development in Tier 2/3/4 cities.
Real estate and infrastructure is another key approach to building the smaller towns & cities into economic powerhouses. If more commercial hubs emerge in India, more economic activity is created, thus there is more of a need for housing and transport. Gurgaon is a great representation of this. As many corporations opened their offices in Gurgaon, there was an exploding demand of living space and appropriate transport. Though Gurgaon real estate prices have recently decreased by 7% in the last 5 years, it was a market correction to stabilize the high demand faced by the market in its early stages. Major real estate developers, such as DLF, saw high returns on their investment by developing housing and infrastructure projects in the then growing region of Gurgaon. Similarly, real estate developers should look to developing housing projects in growing cities such as Vishakhapatnam (AP), as investors and corporations look to exploring into these regions.
The Government's focus on investment in healthcare and infrastructure is also one investors should realize. The 2021 Budget was a big win for healthcare, with a total of INR 2.23 lakh crore pledged towards developing the entire healthcare system across the country. The Govt. will focus on opening several thousand primary care clinic in rural & urban areas, and the private healthcare sector should be very excited. Not only will private clinics be supported by the Govt., but this creates an opportunity for all supplemental industries within healthcare. More clinics, more doctors hired, more disposable income. It will be a multiplier effect, specifically in "smaller" towns & cities as current healthcare hubs, such as Delhi, are already too concentrated. Broader healthcare across the country will reduce the reliance of good healthcare access in only metropolitan cities.
In terms of infrastructure, it will be all brand new in these new towns and cities, take a look at the metro over Golfcourse road in Gurgaon. Mumbai's metro is old and troubled with problems, with a number of stampedes causing physical harm to the people in recent history. In new towns and cities, it will be new and improved. Initiatives such as AMRUT (Atal Mission for Rejuvenation and Urban Transformation) are focused on developing high-quality transportation services in emerging towns and cities. Government spending, as we all know, is a crucial part of the growth of GDP. With massive amounts of investment pledged towards developing healthcare and infrastructure, the "smaller" towns and cities will likely be the biggest winners.
Arguably, consumers are what makes businesses succeed. The massive rise of the middle-class in India, has led to a large number of consumers looking for an experience through new products and services. The disposable income amongst Indians has generally been increasing for the last decade, indicating a greater distribution of wealth. Although India's wealth gap is still very significant, with GDP per Capita at a $2,100, people are still spending and that number is only rising. Consumers want to go seek entertainment at restaurants, bars, cinema halls, shopping malls, etc. Popular premium entertainment chains, such as Starbucks, and PVR cinemas and retail chains, such as Zara or H&M, are still very much focused on metropolitans. However, the great thing about India, is there's an abundance of consumers. The "smaller" towns and cities, as highlighted, have significant populations (> 1 million), many of which are still to see urbanization happen around them. I believe, through the support of the Govt. and private sector investment, the opportunity of capturing value from mass consumers in these smaller towns & cities will be immensely high.
Among other things, India can also look to the US in its development of tech-hubs and suburban/ retirement settlements. In the US, Silicon Valley is the first geography which comes to mind when it comes to technology. In India, its Bangalore and Hyderabad. However, as Silicon Valley becomes very concentrated, startups & Big-Tech are emigrating to newer developments in places such as Austin, Nevada, Cambridge, Colorado, Raleigh, etc. Tesla has recently made plans to move its headquarters to Texas or Nevada. Similarly in India, places such as Noida and Ahmedabad have emerged as secondary locations to Bangalore or Hyderabad. However, states can create incentives for technology conglomerates and startups to branch out to "smaller" towns and cities, where there is no shortage of innovation.
Suburban settlements are a big concept in the US. In India, not quite yet. Though people are opting to reside in places such as Noida to avoid the busy city of Delhi, where quality of life is arguably much better, it is still a fairly new concept. Once more "smaller" towns and cities become urbanized, people will soon start face similar problems as they do as living in a crowded city like Mumbai. Thus, creating family friendly settlements in the outskirts of these regions is something investors should look into further. In terms of retirement settlements, places such as Florida, the "Sunshine State", are home to many retirees, including Donald Trump because of favorable weather conditions, living standards and affordability. As the job culture in India progresses, 20 or 30 years down the line, many people may be looking for retirement settlements outside of the hustle & bustle of big cities. Real estate developers could look to making retirement and family friendly settlements in places such as Kochi. This, like in the US, could create more intra-country migration, which will again have a multiplier effect on the economy of the country, and not just the superstar cities.
Conclusion
The opportunity highlighted in this article is not rocket science, and nor will it be an easy one to capture in the near future. Urbanizing the "smaller" towns and cities of India will require multiple layers of progress before they can reach a realizable level. Heavy Govt. support through infrastructure investment, private sector incentives and overall uplifting of these lesser developed regions, in terms of education and consumerism will all need to happen hand-in-hand before much more if India is urbanized. For the US, it took nearly 80 years to reach an urbanization rate of 85%. It will take time, but India must start taking action on it as soon as possible.
In my opinion, investment into real estate, entertainment & leisure, and branching out of corporations is the crucial responsibility of the private sector to uplift the less developed regions. With that, product & service penetration will automatically be increase through a multiplier effect and in the long-run, will be good for any business. For the Government, the responsibility is in fulfilling its urban planning and infrastructure projects, as laid out partly in the 2021 Budget, to facilitate the development of these regions. Huge government spending will be required. There are several ways to capture value by urbanizing India further, this article only goes over a few.
The advantage India has over the US, is the sheer size of the market. The US has a third of the population India does. Once India is able to solve its urbanization problem, I believe it may well be a contender for a global superpower, like China has become now. At the end of the day, if more of India is urbanized the entire economy will flourish, meaning everyone should have a vested interest in it.
Hope you enjoy the read. Please let me know if you have any thoughts, questions or feedback. Thank you!
Written By,
Abhishek Khetan
BU 2020 Graduate